European politics

France's economy

Moody bleus

IN SOME ways, the decision late on November 19th by Moody’s, a credit-ratings agency, to strip France of its Triple A sovereign credit-rating was not unexpected. The agency put France on negative outlook back in February. Only a month later Standard & Poor’s, another ratings agency, downgraded France from the top rating.

For François Hollande (pictured above), the Socialist president elected six months ago, the timing is awkward. Over the past two weeks his government has begun for the first time to recognise the scale of the country’s economic difficulties and to start to do the right thing to deal with them. In particular, in response to increasing alarm about France’s loss of competitiveness, it recently announced €20 billion ($26 billion) of tax breaks for companies to offset the country’s heavy payroll charges.

So why has Moody’s identified growing risks in France right now? In part, it says, these are linked to troubles in the rest of the euro zone. It notes the country’s high exposure, particularly through its banks, to the battered peripheral economies. It also points to the growing obligations on France as a result of collective European decisions to support such nearly bankrupt countries.

Yet a fair chunk of its analysis touches home-grown problems that France cannot blame on others. Moody’s identifies two other reasons for its downgrade. First, deteriorating long-run economic prospects due to “the country’s persistent structural economic challenges”: “rigidities in labour and services markets” (high taxes and social contributions; high employment protection legislation), “low levels of innovation”, and a “gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base”.

Second, Moody’s points to growing uncertainty about the fiscal outlook. It describes as “overly optimistic” the government’s forecast of GDP growth of 0.8% in 2013 and 2% from 2014. Mounting unemployment, and new tax increases, are likely to dampen consumption further. It anticipates fiscal slippage, and the likely need for more consolidation measures to meet budget-deficit targets.

Moody’s recognises that France has a large and diversified economy, which is why, even after the downgrade, its bonds remain “extremely highly rated”. And it acknowledges the current government’s “strong commitment” to structural reform and fiscal consolidation, which it says might mitigate some of the risks it identifies. Yet the ratings agency is also clear that it does not consider the recent government announcements intended to lower labour costs to be enough, noting that “those measures alone are unlikely to be sufficiently far-reaching to restore competitiveness”.

Pierre Moscovici, the finance minister, this morning played down the decision, stressing that French bonds remain a “safe asset” thanks to a big and liquid market, and blaming the previous government, under Nicolas Sarkozy, for the underlying difficulties. The government also pointed out that bond yields are currently at historic lows. Only four euro-zone countries, Germany, Finland, Luxembourg and the Netherlands, still retain a Triple A credit rating from all three ratings agencies.

Yet the government is clearly rattled by outside criticism right now. This is partly due to the sensitivities of an unpopular executive. But it is also because of internal differences about how far the government should go in loosening the labour market and reducing public spending, in order to improve competitiveness.

By the standards of many left-wing parties in Europe, the French government’s recent decision to reduce taxes on companies to ease labour costs, for instance, was unremarkable. But the French Socialists have long denied that labour costs were a problem and campaigned on a promise to stop factory closures and end austerity in Europe. They have spent most of their time in office so far increasing taxes.

In this context, the recently announced tax breaks represent what Mr Moscovici calls a “Copernican revolution”. He now argues that the Moody’s downgrade is a spur to further reform. But the left of the party is unamused. Mr Hollande himself has refused to talk of a “U-turn”. If the reformists intend to go further, they will have to deal hostility within their own ranks, not to mention a deeply baffled electorate.

I am not sure you understand what the rating actually is. It is simply the likelihood of getting your money back if you lent money to the rated entity.

GDP growth is only tangentially relevant, and in the case of France, when it joined the Eurozone (and accepted the German-controlled ECB as lender of last resort) it limited itself to taxation as the only guaranteed vehicle to repay debt e.g. some if its emergency ability to guarantee French govvy bonds was potentially lost.
Hence any downside risk to taxation (high labour cost, falling competitiveness) increases credit risk, and so France was downgraded.

Arbitrary and frankly silly comparisons with the UK are off topic and irrelevant [and far too common with the French]

Lastly, the ECB and all the eurozone funding entities (EFSF etc) take Moody's ratings seriously. The fact the market did not move is simply the fact the action was not a surprise - it does not mean it is not important.

It's amusing how so many of the comments blame the rating agencies, which apparently have an interest in sinking France's economy.
It reminds me of some my lazy classmates in school who did not prepare for tests and then said they got bad grades because the teacher did not like them and wanted them to repeat the year.

The problem with this downgrade is that it's not based on precise, verifiable criteria (like for example: we will downgrade France if its debt to GDP ratio goes over xxx % and/or its growth fails to reach its 2007 peak) but vague and spurious concepts, that change depending on what's in the news (and in The Economist) at the moment. That's why the French (and the Spaniards and Italians before them) are furious.

These are decisions with huge consequences that are left to the arbitrary interpretation of a couple of Frankfurt-, London- and New York-based analysts who seem to move the targets constantly.

Why has labour market reform to do with credit risk? Why does the fact France does not have "a national central bank" was cited as credit negative, since the OMT programme makes changes of default virtually inexistant?

France and the UK were placed on negative outlook on exactly the same day in February this year. What happened since? Britain had a double-dip recession and will exceed its budget deficit targets this year, taking its debt-to-GDP ratio over France's this year or next, while France avoided recession (and without the help of the Olympics!) and is actually reducing its deficit to around 3% (even if it was 3.5% as the EU says, that'd still not be as massive as the UK's 7%).

So Moody's has to justify these double standards, and improve the transparency of its decisions. The muted market reaction to the downgrade this morning is a warning to Moody's too: you're not the oracle you pretend to be, without changes you're risking to become even more irrelevant.

This one'll defend the rating agencies till they start downgrading the UK (which they won't anyway). He's basically reflecting his own type of mentality onto us, and is unable to see that what they're doing now is pro-cyclical and is actually contributing to the crisis. It is very simple, any European nation these days goes bust if their interest rates go above 6-7% . Get the rating agencies to downgrade them on a trimonthly basis, write a few ridiculous articles about 'exposure to periphery' and other meme spouting and the like, and you'll get that precise outcome. Which means, they contribute to the crisis, and as such, need to be put in their rightful place - the bin.

The fact of the matter is that countries like the Netherlands are extending help to countries like Portugal, and that the former make a positive contribution to European integration, while the latter put it at risk.

I have no doubt that the Portuguese would be as solidary as the Dutch if they were in a similarly strong position. But the fact is, they aren't.

Nobody is expecting you to say thank you for the help you are receiving. But at least have the decency to shut up when you take it.

They are private concerns making the most of their business environment, as is their duty.

That environment happens to be one of institutional oligopoly, thanks to widespread prudential rules which actually compel institutional investors to follow their advice, ie not to purchase or hold debt under a given grade, regardless of their considered opinion (if any). In the context of generalized trading of toxic assets generated (or revealed) by the subprime crisis, such strengthening of prudential rules was only logical.

However oligopolies have clear disadvantages, one being a strong disincentive to maintaining quality output. The big three are competing with each other on cost only. Why shoulder the expense of top analysts, in-depth monitoring, and independent thinking, when being content with summarily rehashing the current ultraliberal doxa does the job at minimal cost? In fact, for a rating agency, going the methodological and ethical distance would be suicidal - high costs and an uphill battle to preserve its good name in the extremely conformist financial establishment.

The rating agencies did not create the oligopoly which feathered their bed. Governments did, in a hurried move to plug the perceived lack of caution of institutional investors, and in their all too fashionable worship of the (then) undisputed ultraliberal faith - which precluded state or international supervision on the basis of agreed standards.

This can only be addressed by the Governments, with readjusted regulations. The onus of prudential conduct must be once again put on the institutional investors, which now are only too happy to rely on the agencies' inexpensive guidelines. Rating agencies should be encouraged to compete on quality, possibly through more open competition, and to guarantee that quality through open process, peer reviews and the like. There is no reason why, in a carefully designed and agreed new business environment, they could not provide the quality service which is needed from them - while still earning a healthy profit.

Coming back to France's sovereign debt, would such a change bring about more lenient or more stringent grading? I truly have no idea.

But it would give the agencies' output much more authority, whereas they are now open to the usual indictments of incompetence, corruption and (rather visibly) merely parroting the line and verse of the Old and the New Testaments - TE/WSJ Op/ed. Therefore removing any usefulness their advice could possibly have.

Its about time the French dropped the arrogance and start to tackle the problems. I live and work in Malta that appears to be a safe haven from economic troubled waters. Why is that? We are competitive, have good IT infrastructure, education and an excellent command of the English Language.

There is evidence to suggest Moody's is corrupt.
But the most significant evidence of all, which doesn't suggest, but rather demonstrates, is that Moody's is extremely incompetent.
And biased.
They should go rate their great-grandmother's fat rears.
It would be a better service for human kind if they did so.

Moody's motivations as is typical with the rating agencies these days, were clearly political.

How private companies are allowed to meddle into the politics of sovereign nations is something we should all be worried about.

It is time to put an end to this farce. These companies are not fulfilling their role as 'raters' but rather as protectors of vested interests. They're an oligopoly - they are biased, wrong most of the times, and there is so much evidence to suggest that not only their corrupt but that their economic models to rate sovereigns are as good as what's written on your toilet paper that it is only so sad that you still have people actually believing a word of what they say.

and? Does it change anything? It's not a question of getting good or bad ratings it's a question that even if they perhaps in a distant 8and probaably imaginary past) were providing a good service, they no longer are. It has been proven that they had their share of responsibility in the previous crisis (the one which started this one), and they have clearly made this one worse, with their insidious comments, and periodic downgrades of certain sovereigns!

The fact of the matter is that countries like the Netherlands are extending help to countries like Portugal, and that the former make a positive contribution to European integration, while the latter put it at risk.

I have no doubt that the Portuguese would be as solidary as the Dutch if they were in a similarly strong position. But the fact is, they aren't.

Nobody is expecting you to say thank you for the help you are receiving. But at least have the decency to shut up when you take it.

But right on, I say: The truth hurts, but the truth shall set them free.

1) Re: THE BIG SOUTHERN EUROPEAN F*** UP:

Yes, Southern Europe is paying the price for a decade or two of delusion. And they make the non-delusional rest of the euro zone share the burden - and insult it on top of it. That' s hard to take, but if denial wasn't a problem of pandemic proportions;-), Southern Europe wouldn't be were it is right now, I guess.

2) Re: PROLIFERATE PEDRO FROM (EX)PROFLIGATE PORTUGAL:

"As per usual your [Pedro's] inferiority complex is there for everyone to see"

to all of those who are bashing the rating agencies please show me at least a minimum amount of evidence that they are downgrading to serve the interest of others rather than to provide objective truths....and no saying that Anglo Saxons are out to destroy the French is not a acceptable form of evidence.